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What SolarCity’s earnings say about the challenges of building a solar retail business

This article originally appeared on GigaOM Pro, or premium research subscription service.

What are the challenges of growing a solar installation company? SolarCity (s SCTY) provides some good insight into that question as it reports earnings for the first full quarter since it became a public company last December.

Raising funds to support its financial product offerings, signing up a greater number of new customers, expanding its operations, and shortening the project completion process are just some of the issues outlined by SolarCity’s executives during their discussion with financial analysts yesterday.

These issues are nothing new, of course, but SolarCity’s financial results help to quantify some of their costs. Given that the solar market is still young, most of SolarCity’s competitors are private and often much smaller.

The California company installed more megawatts of solar energy projects during the first quarter than it initially anticipated (46MW instead of 41MW). But it didn’t raise its 2013 installation forecast, which remains at 250 MW this year. SolarCity boosted its first-quarter sales to $28.2 million but posted $31 million in losses.

“At this stage, we still find ourselves delivery constrained. It’s a matter of scaling our residential operation as well as bringing in our commercial projects on schedule that prevent us from increasing the guidance from 250MW right now,” said CEO Lyndon Rive during the conference call. “We are just focusing our operational capacity.”

SolarCity runs on a business model that is quite different from many of its competitors. The company does the sales, engineering, installation and maintenance with its in-house crew. Rivals such as Sungevity, OneRoof Energy, Sunrun and Clean Power Finance farm out the installation and maintenance work to roofers and other installers. Some of them want to build their brands and invest in marketing and sales to consumers while others sell their financial products and services to installers. Vivint, which has built a large home security system business before getting into solar, operates more like SolarCity.

SolarCity’s model requires much more capital to scale up the business. It needs to hire and train more people, maintain trucks and other tools of the trade and set up shop in expanding its reach across the country. It also has to aggressively court consumers.

The company does business in 14 states, and in March it announced a plan to set up operations in Nevada. The company saw its operating expenses grow from $24.7 million in the first quarter of 2012 to $34.5 million a year later. It serves home and business owners, as well as schools and government agencies. It’s getting into the utility market, too. By the end of the first quarter, SolarCity had accumulated 54,416 customers, and most of those customers are in the residential space: 33MW of the 46MW it completed during the first quarter went to homes.

Raising enough money to finance leases and power purchase agreements is another big challenge for SolarCity and its competitors. With leases or power purchase agreements, customers pay a monthly fee for the electricity generated from the solar panels on their rooftop. They don’t own the panels, however, since they didn’t pay for the high upfront costs of the equipment and labor that can run around $20,000 for an average system in places like California.

The investors that give the funds that support those financing options own the solar electric systems, and they get to take advantage of a 30 percent federal investment tax credit and count on revenues from the monthly payments for the duration of the contracts, which usually run 20 years. As of May 10, SolarCity has enough funds to finance 158MW worth of projects.

SolarCity is a formidable fundraiser. In its 2012 annual report, the company said it had raised $1.7 billion to finance installations since its inception from companies such as U.S. Bancorp, Google, PG&E and Credit Suisse. SolarCity also puts in its own money in some of the funds to finance the installations. The pressure to raise money consistently is even greater now that SolarCity is a public company and must not only show growth but also generate profits at some point. It doesn’t want to be in a situation where the demand for its leases outstrips the funds available, something that happened to SunPower during the first quarter of this year.

SolarCity also needs to shorten the amount of time it takes from selling solar panel systems to installing each project. It has 195MW of backlog, some of which are planned as multi-year projects. But overall, the company wants to sell and install the equipment during the same month, Rive said. To accomplish that, the company is constantly looking for ways to simplify the installation process by using different designs for racks and other components. It also invests in software to reduce the time it takes to apply for permits and complete the sales process.

SolarCity has been an interesting company to watch since its start in 2006. It was one of a crop of venture-backed companies in the emerging residential solar market. Now, how well the company can grow its business and make a profit will be used by investors to evaluate other solar retail service companies that want to go public.

10 Responses to “What SolarCity’s earnings say about the challenges of building a solar retail business”

yep, it was about a year and half ago from SolarCity, here at Maryland.
The price may be a little lower now. Or may be not, since at that time bunch of companies just came to MD with this new Lease option and were competing..

Photovoltaic design/build firms can definitely get panels for cheaper than $1.25/W wholesale. I know because I do.

I think that solar leasing is going to end up being judged a scam. Solar City is under investigation for tax fraud. They are claiming a 30% tax credit on the net present value of the electricity the system will generate, which they can inflate by assuming unrealistically large increases in utility electricity rates. With homeowner-owed systems, the IRS has been pretty clear that the 30% tax credit is to be applied to the homeowner’s out of pocket expense (retail cost minus any local up-front incentives), not the net present value of the electricity. I predict that Solar City and other companies trying to scam the tax credit are going to have to pay a lot in back taxes and penalties.

Solar City is the subject of a class action lawsuit. Some of their customers are suing them because they aren’t saving the money that Solar City said they would. Their leases typically have an “escalator” that says the lease payments will increase by 3% each year. They justify this by saying that utility rates will increase by 6% annually. The problem has been that the utility rates aren’t increasing that fast, so the people leasing systems end up losing money instead of saving money. The people at utility companies that I have asked about this say that 6% annual utility rate increases over the next 20 years are highly unlikely. They are more comfortable with 3%.

The solar lease contract states that if the person leasing the system sells the home, the the lease has to either be paid in full or assumed by the new homeowner. However, the new homeowner must meet Solar City’s credit requirements, which are sometimes higher than what the bank will require of the homebuyer. This effectively gives Solar City a veto over who can by the home of one of their customers.

The solar leasing contract states that if the PV system needs to be removed for roof replacement or repairs, the homeowner must pay for it. Their insurance will not pay for it because if the system is leased, it is not part of the home, so it isn’t covered by home insurance. Solar City won’t pay for it because the roof isn’t theirs, it is the homeowners, so it isn’t their problem. A typical cost for removing and reinstalling a PV system is about $1/W, so the expense is not small. This reflects the basic stupidity of trying to say that a roof-mounted PV system is an appliance that can be leased, rather than a home improvement like a deck or driveway or kitchen countertops or new roof.

Solar leasing was born from a desire to scam the tax code. That is a bad way to run a business.

While I agree with Mr. Boggs that the lease-transfer issues are potentially a much bigger deal than the solar companies tend to imply, I agree with ishekar that I’m not seeing purchase options here (SF Bay Area / PGE) that are anywhere near 1/3 the prepaid lease costs for the same system from the same installer. That being said, $6400 for a 20-year prepaid lease for a 5.6kw system (if indeed that cost is being ascribed to that system size) is a pretty sweet deal.

If you think the leasing company’s losses are news now, just wait until the public wakes up from drinking their “Solar Lease Koolaid” and discovers that it costs as little as 1/3 the money to own a little to no maintenance solar system than it does to lease. Even prepaid leases are far more expensive than owning at today’s prices and that’s including inverter replacement. And just wait until these leasing customers start seeing the effects that their automaic payment escalators will have on their lease payments as their payment increases start to kick in. The final blow will come when these leasing customers attempt to sell their homes and they find that no one can qualify for or wants to take over their remaining lease payments on used, outdated solar equipment, when they can buy a brand new, state of the art solar system for tens of thousands less. It will be “Hasta La Vista Baby!”

wait for what, eternity ? With no figures whatsoever you are making your case based on something happening way in future ?!

The best rate I can find for panels $1.25/watt. Not sure, what type of warranty and lifetime are on these panels but assume that’s the rate for panels. Now add to that the cost of invertor, roof mount, cables and meters etc.Assuming you did all the installation yourselves , which btw is the cost-bottleneck in my researching, costing about 2-3$/watt (not sure why it should cost so that much but that’s the cost I got from my local installers), how much in your mind a 5.6KW system will cost to own ?

Now how about $6400 for lease for 20 yrs with no monthly payment ? you still seriously think it would cost 1/3 of that to own?

“automatic payment escalator”, “solar lease koolaid”: really ?? that’s how you make your case, just using some random words.

For any of you doubters, here’s the “figures” that ishekar asked for. Since KA mentioned the SF Bay Area, visit Yahoo and type in San Francisco solar. There you will find a website under the same name. There you will find a complete, name brand, 3.92 kW grid tie solar system with solar panels, inverter, wiring, disconnects, rails, mounting hardware, flashing or tilehooks, safety labels and ground clips for $1.70 a watt or $6,664. Add in sales tax $566.44 for a total of $7,230.44.

Next add in $1.30 a watt for a typical installation including permit fees or $5,096. $7,230.44 + $5,096 = $12,326.44.

Next take the lease payment example that’s currently posted on Solar City’s website for basically the same size 4kW solar system and multiply their advertised lease payment number ($110.00 per month) times 20 years wihch equals $26,400. (Not considering any payment escalator)

Divide the $26,400 in lease payments by the final cost of the purchased and installed system ($8,628.51) and you get 3.05 time the cost to lease versus a purchase.

When you lease, your are not investing in anything. You have substituted one expense, your electric bill for another expense, your lease payment. When you lease, in the end, you will have nothing to show for it, no asset.

Prices on complete 5kW solar systems are even lower at only $1.66 a watt. Solar Lease Koolaid anyone ?

ishekhar, sorry to burst your bubble but you paid far more to rent their system than you think. You see you forgot to mention the 30% federal tax credit that you handed over to the leasing company. According to the CEC, the average price in California for a solar system under 10kW is $6.19 a watt (And California is one of the lowest priced markets in the country) So that means that the 5.6kW system that you rented from the leasing company really cost you about $6,400 + $10,399 (tax credit that you gave away) = $16,799.

There’s no such thing as a $0 down solar lease or PPA because as a down payment you’re giving the solar lease or PPA company not only the 30% federal tax credit worth thousands of dollars but also any other financial incentives that are available in your state. And by the way, I don’t make my cases with “random words”, only facts. Facts that you chose to ignore when you signed the solar leasing company’s contract.